The Car Analogy for Investing: Your Financial Road Trip

I remember when I first decided to learn about investing. I thought it would be super complicated and advanced, and I’d need another master’s degree just to figure it out.

After all, most of what we see on the news is investment charts, daily stock changes, and “experts” diving into the financial analysis of the largest publicly traded companies.

It turns out investing is actually pretty darn simple. We’ll use an analogy to cover the basic things you need to know when you start.

Your Road Trip (to Financial Independence and Beyond)

Let’s assume you’re going on a trip: a road trip that begins the day you start investing money for the future.

Depending on how long you have before you need the money, you may have a pretty long journey ahead. Let’s assume you are heading from Los Angeles to New York City and that this long road trip is to retirement.

You know you need a car to get there, as many of your BFFs to come with you as possible, and gas to fuel the car. You’ll also want to ensure your car is well maintained and that you have planned a smooth route (I’ve hit Nebraska in the middle of the winter, and it’s not pretty).

The Car Make: Financial Institutions

In this analogy, the car represents a financial account.

You are the car’s owner, but the make and model are the financial institution and the type of account. Just like there are all kinds of cars on the roads, there are numerous different institutions that have unique offerings.

Some of the most common financial institutions include:

  • Fidelity
  • Vanguard
  • Charles Schwab
  • E*Trade
  • Robinhood
  • Betterment

The Car Model: Account Type

If the make of the car is the financial institution, then the model of the car is the type of account.

Legal and tax implications account for most of the reasons we have different account types (ahem, car models).

Some of the common account types include:

  • Brokerage Account
  • Traditional IRA
  • Roth IRA
  • HSA
  • Traditional 401k/403b/457
  • Roth 401k/403b/457
  • Annuity
  • 529 Savings Plan

To put this together, you might own quite a few cars that you are taking along on your Retirement Road Trip:

  • a 2018 Vanguard Traditional IRA (a practical sedan…probably)
  • a 2024 Vanguard Roth IRA (a basic sports car – great tax advantages!)
  • a 2021 Fidelity 401k (another sedan, perhaps?)
  • a 2020 Charles Schwab HSA (this one is a fancy sports car-the best tax advantages!)

You’ll have other road trips to other destinations going on at the same time that you’ll need cars for as well, such as taking routes that arrive at college funding, a home purchase or other long-term goals.

Let’s say, for this example, though, that we are driving around in a brand new 2024 Fidelity Traditional IRA. We just opened the account bought the car after discovering the amazing tax benefits of the Traditional IRA model. It’s new and shiny, and we’re excited to have a new car to accompany us on our road trip to retirement.

The Car Components: Engine, Tires, Brakes, Steering Wheel

Our investment car requires many components to keep it running properly. Fortunately, once these pieces are in place, they generally only need regular maintenance to keep everything in working order.


The engine is the most essential component to powering the car, just like your core strategy is what propels your investment journey. A core strategy in investing includes:

  • Active trading vs. a buy-and-hold strategy
  • Investing in index funds vs. individual stocks

Numerous studies have shown that the best core investing strategy is regularly investing in low-cost index funds and holding those investments for the long term instead of trying to beat the market.

Steering Wheel

The steering wheel of a car is the asset allocation strategy that controls the direction of the portfolio.

A typical asset allocation consists of a desired percentage of stocks, bonds, and real estate. While stocks have generally outperformed bonds in the long term, they are also much more volatile to market conditions, so both serve a purpose in your investment plan.

Some asset allocation models are more detailed than others. Stocks can be divided between US and Foreign stocks and based on the company size (market capitalization). Bonds can be divided by term, yield, etc.


The tires on the car provide stability and traction during rough conditions.

Bonds or other fixed-income investments generally provide stability in your investment portfolio. If you lose traction and slip off the road because you can’t stick to your investment strategy, you will not reach your destination.

Everyone wants to go fast, but it’s important to ensure that you have the traction to be able to stay on the road.


Risk management is important to keep you steady on your journey. Diversification is the most important way to ensure you don’t have all your “eggs” in one basket.

Fortunately, it’s easy to diversify your investments if you invest in low-cost index funds. There are many index funds that allow you to invest in large portions of the stock and bond markets with just a single fund.

For example, VTSAX (Vanguard Total Stock Market Index) allows you to invest in large, mid-size, and small US companies while only purchasing one fund.

The Driver & Passengers: Individual Investments

One thing I see people often get confused about is the relationship between the type of account and the investments within the account. A Roth IRA is not an investment itself, it’s just a type of account.

The individual investments in the account are like the passengers in the car. They all have different personalities and provide something unique and different to the party. Sometimes, they take turns being the driver.

You still have to figure out what investments to put in your account; otherwise, you just have cash sitting in the account, doing almost nothing. It’s like having a car without someone to drive it (we’re assuming here that cash doesn’t know how to drive; it’s just a passenger).

Stocks, bonds, and real estate are the most common broad types of investments. If we get more specific, our passengers might be named:

  • Vanguard Total Stock Market Index (VTSAX)
  • Vanguard 500 Index (VFIAX)
  • Vanguard Total Bond Market Index (VBTLX)
  • Vanguard Total International Stock Market Index (VTIAX)
  • Fidelity Freedom 2050 Fund
  • Apple (AAPL)
  • Nvidia (NVDA)
  • Amazon (AMZN)

Each passenger plays a part in determining the route and whether there are any detours. They tell the driver which direction to go and sometimes cause the car to slow down or speed up.

Many investors that value simplicity adopt the concept of the 3-fund portfolio, where only 3 holdings are really necessary for a diversified portfolio that will have a return similar to that of the overall market.

The Fuel (+Fuel Taxes & Surcharges): Contributions & Taxes

Now, every car needs some sort of fuel to power it. In the case of investments, we will assume that our car runs on traditional gasoline and that that fuel is the contribution we deposit into the account.

Because if we have an account and don’t contribute anything to it, it won’t take us anywhere, just like a car won’t take us anywhere if we don’t put fuel in it.

Unlike a real car, though, the fuel in our investment car can stay there for an extended period of time.

Let’s discuss the contributions because money is a finite resource, and we also have to consider taxes (gas taxes can be awfully high in some locations!).

First, there are three broad tax categories that will apply, depending on the account type/model:

Taxable: Pay As You Go

The most typical “taxable” account used to save for retirement is a brokerage account. There is no inherent preferential tax benefit received by contributing to taxable accounts, and income earned, including gains from the sales of investments, is taxed throughout the “trip.” Whenever fuel (contributions) is put into the car (account), taxes are incurred.

In our example, we’ll assume that each time we fill up, we only have a certain amount of money (say $50), so we might only actually have $45 worth of gas and $5 in fuel taxes. We’ll also have to pay additional taxes regularly at each stop and continue to pay taxes when we reach the destination.

In real life, certain investment income is taxed at better tax rates, but the varying rates of taxes are beyond the scope of this simple illustration.

Tax-Deferred: Pay Taxes at the End

Traditional IRAs and 401ks are both retirement accounts that are considered “tax-deferred.” Contributions can be made on a pre-tax basis (i.e. either the income isn’t subject to tax or a deduction is received for the contribution). No fuel taxes will need to be paid throughout the entire trip to the destination. However, once the destination is reached, taxes will be owed over a period of time.

In our example, we’ll assume that we can fill the tank with $50 of gas and not incur any fuel taxes until the end of the trip (and even at the end, we’ll be able to spread those taxes over time). So we’ll have a full $50 worth of gas each time we fill up and not have to worry about paying taxes while en route to the destination.

Tax-Free: Pay Taxes at the Beginning

With “tax-free” accounts such as a Roth IRA or Roth 401k, already-taxed income is contributed (just like as with a taxable account). However, you never (as long as certain conditions are met) have to pay taxes on it, including any income and growth in the account.

In our example, we’ll assume that we can only fill the tank with $45 worth of gas out of our $50 allocated gas money, as $5 will go toward taxes. However, this is the only time we’ll have to pay fuel taxes, unlike taxable and tax-deferred situations where tax is due at the destination (and for taxable, throughout the journey).

The Mechanic: Your Financial Advisor (or You!)

The mechanic rebalances your investments periodically, ensures the core strategy is working, and checks in on your route to ensure your car will take you there.

While it’s best for some people to work with a financial advisor, I believe that many people can manage their own investments as long as they are willing to put time and effort into gaining the knowledge and can stay the course when the road gets rough.

The same thing goes here for mechanical issues in a car. You can probably do simple oil changes, air filters, and other minor fixes yourself, and that may be all you ever really need. If a complex situation/repair arises, you may want to consider hiring a professional to help you.

The Map/Route Plan: Investment Policy Statement

A typical investment policy statement (often abbreviated as IPS) is a written document that includes the following:

  • Objective (i.e. reach retirement)
  • Core investment strategy
  • Asset allocation
  • Time frame for rebalancing your accounts
  • Risk tolerance and capacity

Just like a map helps you find the best way to your destination, your IPS also helps you plan your course to effectively reach your investment goals. If you get off track and want to deviate, you can refer back to the IPS to see why you decided on a specific route.

Driving & Road Conditions: Market Conditions

Just like you can’t necessarily know exactly what the weather and road conditions will be like when you leave for a long trip, you are going to have surprises in your investment journey. It may take you longer, or you may have to be flexible with your route, just as if there was extensive construction, rain, snow, or an accident.

In investing, it’s important to understand and expect that the market will be volatile in such a long journey. It’s normal for the market to go up and down.

Final Note

Putting this all together, we can see why it’s so important to have a solid investment plan in place. Being intentional about investing, with a clear route and destination, can help ensure that we have the smoothest trip possible.

After all, the journey of a thousand miles begins with just one step (a step on the gas pedal in this case).


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I’m Kathryn Hanna-wife, mother of 3 and a Certified Public Accountant. I love to budget (really, I do!) , build spreadsheets and spend money on travel, sewing supplies and good chocolate.


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